This issue’s guest column is by Steve Steinbrunner. At the time of writing, Steve was VP Business Development for Four Quadrants Advisory Companies, a national accounting and financial planning firm with only dentists as clients.
I Deserve a Raise!: Why Custom Dental Accounting Really Matters
Would you like to avoid another year-end tax surprise with lumpy cash flow? Do you wonder if you are taking too much salary or not enough? Have you ever had to delay your paycheck a couple weeks because cash was tight at the dental practice and you think a large insurance deposit will drop soon? Are you hoarding cash for fear of a tax surprise? You might pay yourself with random distribution withdrawals at a whim, clumsy and unpredictable, like the tax snafus that often trail behind them. I suggest an “inside out” approach to smooth cash flow and income and boost retirement savings along the way.
Rather than throw a number at a dartboard or guess at income based on what your buddies are doing, take a balanced approach to maintaining practice cash and still keep a fair amount of money going home. First, figure out how much overhead is necessary to fund 45-60 days of payables in the practice. That range will vary for each practice a little bit, based on the business model and certain trends. Let’s say you determined that overhead for 45 days is approximately $65,000. Great, you just figured out how much cash you want in the practice at all times – your minimum practice cash reserve. This balance will float up and down against the ideal, as overhead fluctuates, so pay attention to the monthly averages on your bank statement and how they relate to monthly overhead. Now, you can identify trends in this reserve balance, allowing you and your advisors to take action on the spot. You can take additional distribution income withdrawals in a predictable manner, putting taxes and savings in the right buckets, or make an adjustment to W2 salary if a cash-building trend is identified. Smooth . . .
Most tax advisors for dentists don’t understand the ebbs & flows of a dental practice well enough and base too much on the prior year; however, it’s really a “double whammy” because they reconcile practice numbers quarterly – at best – instead of monthly with proactive advice. As a result, they might suggest you take home most of the cash reserve or stab in the dark at where income should be set. Another mistake is advice based purely on compliance or negligible tax savings. Heavily weighted distribution income can mitigate Medicare tax a bit but it’s often in lieu of a generous W-2 to benefit your practice retirement plan savings. Tax advice can’t be in a vacuum and must take ALL financial aspects of your life in consideration.
If your cash balance is significantly lower than what your own, unique practice reserve should be, here are a few options: 1) decrease your salary if your personal expenses at home can handle it or 2) start strategically cutting overhead within the practice or 3) a combination of both. Overhead changes will not happen quickly and you can’t typically can’t “produce your way out of it.” With a highly custom, dental Chart of Accounts in your bookkeeping software, you can begin a forensic examination of expenses and develop strategies to chip away. Also use clouding technology so that both you (the dentist) and your CPA can access bookkeeping software simultaneously in a secure environment. This way, you can work on the overhead together and discuss all the subcategories of your expenses to determine where to start chipping away – half percentage point here, another half point there. The key to predictable dental cash flow and ultimately, great savings for retirement, starts with a embracing a new era in dental accounting.